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Unorthodox Partnership Produced Financial Gains

Many cash-poor dot-coms paid for their online ads by giving AOL equity in their high-flying stock. Often such deals legitimized companies in the eyes of Wall Street because of AOL's status at the vanguard of the tech boom.

But the difference in this deal was that PurchasePro was not using its stock to buy ads to promote itself on AOL. Instead, AOL was earning warrants from selling PurchasePro software. The revenue was booked as commerce, which is reported in the same income line as advertising sales. AOL said it combines ad and commerce revenue because many of its deals are multifaceted and do not fall neatly in either of those categories.

"The warrants had nothing to do with ad revenue," says former PurchasePro.com executive Charles E. Johnson Jr. "They were directly related to selling our marketplace software to our customers, suppliers and partners." (File Photo/Frank Anderson - Lexington (KY.) Herald-Leader)

_____AOL Series_____
Part I: Unconventional Transactions Boosted Sales (July 18, 2002)
Part II: Creative Transactions Earned Team Rewards (July 19, 2002)
_____Graphics_____
The Heart of a Deal: How America Online Brings Advertising Deals to Fruition
Excerpt of AOL E-mail
A Rocky Road: Graphical Timeline Tracks AOL Stock Price
AOL Documents and Deals Reviewed by The Washington Post
_____Time Warner_____
Stock Quote and News
Historical Chart
Company Description
Analyst Ratings
Timeline: Time Warner Highlights
Company Downsizing Actions
_____Time Warner News_____
Former AOL Chairman Heads Luxury Travel Firm (The Washington Post, Nov 23, 2004)
Time Warner Nears Deal Over AOL Accounting (The Washington Post, Nov 23, 2004)
AOL Concentrates On Security Issues With New Software (The Washington Post, Nov 18, 2004)
More AOL Time Warner News

In return for restructuring the agreement, which included reducing the warrants' exercise price, AOL agreed to give PurchasePro $10 million in revenue, according to AOL's internal documents.

PurchasePro got its $10 million this way: AOL paid it $4.9 million to cover the cost of giving 100,000 AOL customers a free month's subscription -- at $49 per user -- to PurchasePro's marketplace service, which was co-branded with AOL's Netscape portal. AOL also agreed to buy $4.6 million worth of PurchasePro's software, which AOL would distribute to some of its business partners. AOL would come up with another $500,000 by selling ad space on PurchasePro's online marketplace.

The bottom line: AOL essentially paid $9.5 million for $30 million in warrants, netting $20.5 million.

The deal helped AOL boost its income from ad and commerce. Though the category includes the two revenue streams, most Wall Street analysts generally regard the total as an indicator of how AOL's ad business is doing. Such assumptions could be misleading, said Johnson, the former PurchasePro chief executive.

"The warrants had nothing to do with ad revenue," Johnson said. "They were directly related to selling our marketplace software to our customers, suppliers and partners."

AOL declined to make available any officials for comment on the record. Thomas D. Yannucci, an attorney hired by AOL to answer The Post's questions, stated in a letter that the $28 million in revenue associated with the PurchasePro warrants "is de minimis when viewed against AOL's advertising and commerce revenues of $1.4 billion for the same period and AOL's total revenues of $4 billion." He said AOL had disclosed in its financial statements that it sometimes accepts various forms of equity, including warrants, as compensation for advertising and e-commerce services.

In addition, AOL's outside auditor, Ernst & Young LLP, reviewed the transaction and confirmed that AOL's accounting was in accordance with generally accepted accounting principles, Yannucci wrote.

Yannucci said the warrant revenue had been properly recognized in the ad and commerce category.


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